Implementing Your Portfolio Strategy

• Diversification: How Many Stocks Will Suffice? – This 1990 AAII Journal article found that risk drops significantly once at least 20 stocks are held in a portfolio.
  
• How to Take Advantage of Risk Factors – Tilting your portfolio to stocks with certain characteristics can improve returns. Find out how to do it.
  

Pessimism among individual investors about the short-term direction of the stock market declined but continues its streak of staying above 40%. The latest AAII Sentiment Survey also shows higher levels of optimism. Neutral sentiment is slightly lower this week.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded 8.3 percentage points to 32.0%. Bullish sentiment remains below its historical average of 38.0% for the 28th consecutive week and the 33rd week this year.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell by 0.2 percentage points to 27.6%. This is the 34th time out of 36 weeks that neutral sentiment is below its historical average of 31.5%.

Bearish sentiment, expectations that stock prices will fall over the next six months, dropped by 8.1 percentage points to 40.4%. Bearish sentiment is above its historical average of 30.5% for the 30th consecutive week and the 32nd time this year.

Pessimism continues to stay at an unusually high level. Pessimism is above 40% for the 25th time out of the past 28 weeks. Both bullish and neutral sentiment are within their typical historical ranges.

The persisting high level of pessimism reflects concerns about the coronavirus pandemic, the economy and the upcoming election. The recent decline in the Nasdaq composite may have also played a role. Other factors influencing AAII members’ sentiment include the economy, valuations and interest rates.

In this week’s special question, we asked AAII members which factors are most influencing their six-month outlook for stocks. Note that some members name more than one factor.

We received over 100 responses, of which 41% of respondents say that the uncertainty surrounding the outcome of the upcoming election is the most influential factor on their market outlook. This compares to 31% of respondents who say that the country’s ability to manage the coronavirus pandemic and the ability to find a vaccine in the near future are the most influential factors.

About 11% of respondents say that the unemployment rate in the U.S. is the most influential factor. In addition, 10% of respondents say that the Federal Reserve’s policies, low interest rates and tax law changes are the most influential factors. Lastly, about 7% of respondents say that the overly optimistic market valuations and the likelihood that a bubble burst will occur are the most influential factors on their six-month outlook.

Here is a sampling of the responses:

• “Markets are beginning to look at the elections, and the uncertainty—if not the outcome—does not bode well for the near future.”
• “Politics and the likelihood of political change—either further to the right or further to the middle—both affect those who buy and sell. I suspect the stock market will do well although individual companies may suffer severely.”
• “The stock market will ignore economic reality in the hopes that a coronavirus vaccine will be available and solve the pandemic quickly.”
• “I feel there is too much uncertainty to have any firm conviction plus, minus or neutral. In my mind, all of that uncertainty derives from the upcoming general election.”